Arthur Hayes Says, “Get your Bitcoin, and Get Out!”

You might know Arthur Hayes as perhaps THE dominant financial creative writer in crypto. When Arthur Hayes drops an article, it commands the attention of basically everyone in the industry. And he’s done it again with his new piece, “Kaiseki,” which outlines one of the most chaotic and critical times in the macro and monetary landscape that we’ve seen, at least since 2008. In today’s episode, Arthur walks us through his essay, why he believes Balaji’s $1M Bitcoin bet is wrong, how he’s navigating these tumultuous times, and so much more. ------ 🚀 JOIN BANKLESS PREMIUM: https://www.bankless.com/join ------ BANKLESS SPONSOR TOOLS: ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://bankless.cc/kraken 🦄UNISWAP | ON-CHAIN MARKETPLACE https://bankless.cc/uniswap 👻 PHANTOM | FRIENDLY MULTICHAIN WALLET https://bankless.cc/phantom-waitlist 🦊METAMASK LEARN | HELPFUL WEB3 RESOURCE https://bankless.cc/MetaMask 🚁 EARNIFI | CLAIM YOUR UNCLAIMED AIRDROPS https://bankless.cc/earnifi ------ Timestamps: 0:00 Intro 6:27 Arthur’s Recent, “Kaiseki” Essay 13:09 Bank Term Funding Program (BTFP) 18:08 Effect on the Banking Sector 24:30 Current State of the Banking Sector 30:44 Should We Support BTFP? 39:11 What’s Going to Happen to Crypto? 46:56 Sending Bitcoin to $1M 55:05 Effects on Expanding Variables 57:35 Who Takes the Loss? 1:00:00 Rampant Inflation Worldwide & Fiat 1:03:36 Swap Lines 1:06:07 Punchlines & Endgame 1:09:25 Everyone is a Speculator 1:10:49 What Will Arthur Hayes Do? 1:13:36 Closing & Disclaimers ------ Resources: Arthur Hayes https://twitter.com/CryptoHayes Arthur’s Recent, “Kaiseki” Essay https://entrepreneurshandbook.co/kaiseki-b15230bdd09e ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  There's all these things that the average person needs that the government can't print. And if they're just going to not allocate the losses for all this debt, which is essentially debt is, I'm going to take the future and I'm going to spend it today. Right? So we spent the future. There's no more future. Right? We have to pay for it. And so if you have money inside of the system, you will pay for it. And it's an implicit tax on anyone who saves and things that don't go up as fast as the amount of money printed. And so that's the game. It creates a financial speculator out of everyone, even if you don't think you're a speculator, you are a speculator.

• 0:37David Hoffman?

  Bankless Nation, we got Arthur Hayes on the podcast because it is one of those times where there is a bunch of chaos in the macro world. Our banking sector is apparently completely underwater. Balaji Srinivasan is claiming that Bitcoin is going to $1 million inside of 90 days. And it's not a bet on Bitcoin, it's actually a bet on the hyperinflation of the US dollar. And that is a very similar subject to what we are talking to Arthur Hayes today on the show. Recently, Arthur, a prolific writer, has written another article, Kai Seki, we'll get into why he titled that. But a little preview for this, Arthur runs through the last 15 years of monetary and fiscal policy to get up to COVID. And then he runs through COVID up to now and the Fed rug pull of rising interest rates

• 1:22David Hoffman?

  faster than they've ever had before to create a mass insolvency in the banking sector. And Arthur walks us through this brand new thing, this brand new credit facility out of the Federal Reserve, the Bank Term Funding Program, and really unpacks the significance of this. Arthur's big claim here is that the Bank Term Funding Program, the BTFP, is constrained in two ways. Only certain eligible assets are available to access this new credit facility out of the Federal Reserve and this new facility is only alive for one more year. Arthur's big claim is that both of those two variables are about to increase in scope. And that is what is going to ultimately allow for Bitcoin to reach $1 million.

• 2:05David Hoffman?

  And so Arthur is divergent from Balaji in that he doesn't think it's going to happen in 90 days, but he does think it's going to get here pretty damn soon. So that is the preview of this content. I am here without our fearless leader, Ryan. It's just me today on the episode. So bear with me as I navigate this one solo. Before we get into this extremely hot episode with Arthur Hayes, in which he drops a bunch of F bombs. So fair warning about that. We need to talk about Kraken, who is our strategic sponsor for 2023, and is helping you go from what Arthur is calling the inside world of the fiat regime to the outside world of Bitcoin. And if Arthur and Balaji are right, we're going to need institutions like Kraken more than ever. So we'll get into this episode, but first a moment to talk to Kraken and the rest of our sponsors. Kraken has been a leader in the crypto industry for the last 12 years.

• 2:50David Hoffman?

  Dedicated to accelerating the global adoption of crypto. Kraken puts an emphasis on security, transparency and client support, which is why over nine million clients have come to love Kraken's products. Whether you're a beginner or a pro, the Kraken UX is simple, intuitive and frictionless, making the Kraken app a great place for all to get involved and learn about crypto. For those with experience, the redesigned Kraken Pro app and web experience is completely customizable to your trading needs, integrating key trading features into one seamless interface. Kraken has a 24/7 365 client support team that is globally recognized. Kraken support is available wherever, whenever you need them, by phone, chat or email. And for all of you NFTers out there, the brand new Kraken NFT beta platform

• 3:33David Hoffman?

  gives you the best NFT trading experience possible. Rarity rankings, no gas fees and the ability to buy an NFT straight with cash. Does your crypto exchange prioritize its customers the way that Kraken does? And if not, sign up with Kraken at kraken.com/bankless. Learning about crypto is hard, until now. Introducing MetaMask Learn, an open educational platform about crypto, Web3, self custody, wallet management, and all the other topics needed to onboard people into this crazy world of crypto. MetaMask Learn is an interactive platform with each lesson offering a simulation for the task at hand, giving you actual practical experience for navigating Web3. The purpose of MetaMask Learn is to teach people the basics of self custody and wallet security in a safe environment.

• 4:16David Hoffman?

  And while MetaMask Learn always takes the time to define Web3 specific vocabulary. It is still a jargon-free experience for the crypto curious user. Friendly, not scary. MetaMask Learn is available in 10 languages with more to be added soon, and it's meant to cater to a global Web3 audience. So are you tired of having to explain crypto concepts to your friends? Go to learn.meta mask.io and add MetaMask Learn to your guides to get onboarded into the world of Web3. How many total airdrops have you gotten? This last bull market had a ton of them. Did you get them all? Maybe you missed one. So here's what you should do. Go to Earnify and plug in your Ethereum wallet, and Earnify will tell you if you have any unclaimed airdrops that you can get. And it also does PoApps and mintable NFTs. Any kind of money that your wallet can claim, Earnify will tell you about it.

• 5:01David Hoffman?

  And you should probably do it now because some airdrops expire. And if you sign up for Earnify, they'll email you anytime one of your wallets has a new airdrop for it to make sure that you never lose an airdrop ever again. You can also upgrade to Earnify Premium to unlock access to airdrops that are beyond the basics and are able to set reminders for more wallets. And for just under $21 a month, it probably pays for itself with just one airdrop. So plug in your wallets at Earnify and see what you get. That's E A R N I dot F I. And make sure you never lose another airdrop. Arthur Hayes is a man that needs no introduction, but I will introduce him anyways. Arthur co-founded Bitmex in 2014, one of the original leveraged trading platforms that dominated the space during the previous bull cycle. Bitmex got in trouble with the powers that be, and now Hayes has moved on to be the chief investment officer

• 5:45David Hoffman?

  of a family office maelstrom. But you might know Arthur as perhaps the dominant financial creative writer in crypto. When Arthur Hayes drops an article, it commands the attention of basically everyone in the industry. And not only is this one of those times in which we say, babe, wake up, a new Hayes piece just dropped, but it's also one of the most chaotic and critical times in macro and monetary landscape that we've ever seen, at least since 2008. So Arthur is going to hopefully walk us through how he is navigating these stormy waters as a banking crisis seems on the brink of creating a monetary crisis and what we all need to do about it. Arthur, welcome back to the podcast.

• 6:24Speaker 00

  Thank you for having me.

• 6:26David Hoffman?

  Cheers, my man. This is, like I said, stormy times, creative, and your creative writing, I think, has led people along and navigate, helped people navigate this path, and I think that is what we want to do here today. And you start off this piece in good fashion with some really interesting literary elements, starting with this line, "When you sit down for a Kaseki meal, the destination is known, but the path is not." And that really is the way that you guide us through this article. Can you talk about how this relates to the money printer? Because that's, I think, what you were really referring to, is a lot of these crypto people, myself included, we've all said, "Eventually, the money printer's coming back on. We don't know how, we don't know when." But this is how you start off this article. Can you just unpack this metaphor? Because I think it's going to help us guide us along as we go.

• 7:11Speaker 00

  Well, I think a lot of people in crypto and just financial markets in general have gotten into the habit of studying past cycles to get informed on how the policymakers will react to another disturbance in the banking industry. And if we go back, you know, hundreds of years when central banks were first created, and obviously, the most important one today, the Federal Reserve, created in 1913, and we look at what they do every time there is a flare-up or some sort of financial risk, we find that they resort to printing money. And the most poignant example of what happens in their minds when they don't print money

• 7:52Speaker 00

  is the 1930s Depression in the US. And if you remember, the Fed was not as happy with the "money printer go brrr" button back in the day, and they actually allowed baking credit to get liquidated. I think, I forget if you were Secretary of the Treasury or not, but Andrew Mellon remarked that they need to let the leverage get cleansed out of the system, and people need to go bankrupt. And this was sort of the ethos back then, a little bit more huge to the free-market capitalism versus, you know, modern-day corporate socialism that is in most countries around the world.

• 8:33Speaker 00

  And so the US authorities essentially let the banking crisis unfold. They let the system get cleansed of the leverage. And one can argue that the US actually put itself in a better position vis a vis Europe, who didn't do the same thing, faced with the same sort of deflationary impulses. And ultimately, that led the way for the US essentially to bail out the Western world when they decided to blow themselves up in World War II. But after that, everyone learned this lesson, they thought they learned this lesson, that anytime there is the threat of deflation, anytime there is a threat of a banking panic, for whatever reason, the response must be to print money. And every single cycle, they come up with a new term for it.

• 9:15Speaker 00

  You know, the most recent one was quantitative easing, which I believe was a phrase coined by Professor Werner when he was talking about the Bank of Japan after the 1989 crisis. And essentially, it just means that the central bank, in some way, shape, or form, is printing money. Now, technically speaking, it's not like the Federal Reserve has a money printer and there's a bunch of dollars coming out. In the prior circumstance, the Fed was printing bank reserves. And so you see this balance on the Fed's balance sheet of how much excess money the banking system has, and it's something like $3 trillion, last time I checked. But that's essentially what they respond to. And so as crypto people, like, okay, well, 2009, right after the global financial crisis, Lehman Brothers went bankrupt.

• 10:00Speaker 00

  That December, Ben Bernanke had basically announced that he is going to embark on this thing called quantitative easing, purchasing these assets to sort of, you know, bring financial conditions more fluid, so that people can make loans and businesses can expand, at least in his theory. And starting in March 2009 is when the Fed made its first purchase, and that pretty much marks the bottom of the S and P around 666. And obviously, we know that Bitcoin genesis block was, you know, in January of 2009. And some could say that it was in part a direct response to, you know, the biggest financial crisis since the 1930s and the response of the authorities, which, different from then, was to, okay, we're going to print money and bail everybody out.

• 10:45Speaker 00

  So we went through that cycle from 2009 until, basically up until 2020, when prior to COVID, the Fed was toying with this idea that they were going to, in Janet Zellman's words, "watch paint dry" as their balance sheet declined. And Jay Powell, who was the Fed Chairman at the time, was in the beginning of trying to tighten monetary policy. And then all of a sudden, COVID-19 happened. And, you know, there were this specter of lockdowns in America, and the financial conditions started to tighten. Everybody was worried about all these different companies going out of business. The corporate credit market froze. And, you know, there's just basically a tailspin in the S and P 10-year Treasury

• 11:27Speaker 00

  touched a low, intraday low, I think 33 basis points. And then the Fed responded with an immediate emergency meeting. And they said, essentially, we're going to nationalize the entire US corporate bond market by guaranteeing triple B and above. You can sell to us. And we're going to provide infinite liquidity to make sure that financial conditions can stomach this pandemic. And then, obviously, in response, the US federal government, out of any government in the entire world, develop and developing, printed the most money by basically handing out checks to people. The STEMI checks, right? Everybody got a check. Some people bought, you know, went on Robin Hood and punted crypto and Doge and stocks, whatever. Some people bought, you know, got a, put down payment on a new car, whatever.

• 12:11Speaker 00

  Everybody got money and everybody did whatever they wanted to do with it. Right? And so that was in the tune of a few trillion dollars. And guess what? People were like, oh, that's kind of inflationary. We don't actually want to own US Treasuries if the government is just going to be handing out money to people. So what happened? The Federal Reserve, you know, did their job, and they bought almost half of the issuance of this debt and underpinned this massive amount of money printing, the most since World War II for the US. And obviously crypto went from, you know, 3.5, 4,000 to 69,000 at the peak. And then, obviously, they thought, oh, my fucking God, we overdid it. So we need to go the other direction. And then, you know, Jerome Powell raised rates the fastest of any Fed Chairman in modern-day history. And now we are where we are today,

• 12:55Speaker 00

  the consequence of super easy monetary policy in one direction, really quick, super tight monetary policy in the other direction, really, really quick. And now we essentially bankrupt the entire US banking system.

• 13:08David Hoffman?

  So the punchline that I think really we need to get to is this thing called the BTFP, the Bank Term Funding Program. And thank you for walking us through like what was the setup to this. But I want to really just drive this, the setup home. And so a bunch of money gets printed in this crazy bull market that happened both inside and outside of crypto. And as a result of that, a bunch of new money gets deposited into a bunch of new banks. And this kind of sets up a lot of these commercial banks, the commercial banking sector, into kind of a trap. Because once the Fed raised all the interest rates, all of a sudden the paradigm shifts. Can you walk us through that last bit of context to set us up for this Bank Term Funding Program?

• 13:52Speaker 00

  Sure. So obviously, you know, post the global financial crisis, essentially, the US banking system is bifurcated into the super large, too big to fail. They call them globally systemic important banks, like the JP Morgan, the Citi, Wells Fargo, Bank of America, those type of banks. And then you have everybody else, right? And there's a lot of new regulations passed on how to do banking in the US and around the world. That's Dot Frank in the US and Basel III internationally. And basically, what it meant was only the really large players could really make money because it's just so expensive to be a bank. But, you know, America is very, you know, there's obviously high income disparities

• 14:35Speaker 00

  between people and businesses, but there is a big tail of people at the middle and the low end, right? And all these people got checks from the government. And what do they do? They went to their local bank. It might not be a JP Morgan or a Citi, might be a community bank or regional bank, and they deposited all this money. And then, you know, let's take the one case everybody's really focusing on, the Silicon Valley Bank. Okay, and you have this, this history of startups raising a lot of money. You have 2020, 2021, this massive money printing, tech is just going bananas, people raising massive rounds. And what do they do? They stick all their money right back into the bank that was supporting them, Silicon Valley Bank, right? Another, you know, no name, small bank that sort of rose in prominence. I don't know who published this chart, but there's a great chart that shows percentage

• 15:20Speaker 00

  rise of deposits over the last three years. And you see Silicon Valley Bank is like one of the biggest beneficiaries. Of of just deposits in general. Uh, and so as a bank, what do you do when you get a lot of money, right? The the job of a bank is to take money from depositors and to lend it out, right? And, you know, as we know, banks will actually like to take real risk. If there's a way that the bank can earn money without taking a lot of risk, and the risk in this sense is more like a credit risk, right? Lending to an individual person or a small business is way riskier than lending to to the United, an arm of the United States government. So the bank says, okay, well, I'm getting all these deposits essentially for free. I'm paying zero percent. I can go lend to the US government and treasuries one to two percent.

• 16:05Speaker 00

  I can help originate mortgages or buy mortgage-backed securities and those yield three to four percent. And then on billions and billions of dollars, I just get to sit here and take money, pay nothing, lend money to this government, and I make one to three percent net interest margins. That's a fucking great business. And, you know, as I pointed out in the article, the shares of the small banks, you know, soared, right? Something like over one and a half times uh in uh from two thousand and nineteen to two thousand and twenty-one at the peak because these banks had never had so much deposits, never had so much raw net income from just lending to the US government. And then as a maker, how can you, how can you lose your job? It's not like I'm going out and lending to like sketchy individuals.

• 16:48Speaker 00

  I'm literally lending to the US government who essentially regulates me. So what what's wrong with this? I I don't see, you know, if I'm I'm thinking of a bank manager, this is like, this is the best trade ever. My stock price goes up, I make a lot of money, I'm taking little to no credit risk um because I'm lending to the government. So

• 17:05David Hoffman?

  And and also importantly, they're buying very long-term bonds, correct? That's also like a super important part of the story?

• 17:12Speaker 00

  Yeah, so they they they they didn't, they couldn't just lend to the US government on like an overnight basis or a one-year basis because that was basically zero. Because that was where the Fed, the Fed plays in that, you know, zero to one to two-year mark. That's where they really control um the short end of the curve, and that was at zero percent as per Fed policy. So it's okay, we need to take more duration or time risk. Let's lend to the government for longer periods of time so we can earn more income, right? So that's, you know, ten-year treasuries, third-year mortgage bonds. And essentially what that means from a risk perspective is the longer the bond, the riskier it is uh as interest rates change.

• 17:50Speaker 00

  And so a small change in interest rates can change the price of a 10-year, 30-year bond much more than a small change in interest rates can change the price of a bond that's going to mature in the next year. And so the banks, instead of having credit risk, they had duration risk. If interest rates rose, they stand to lose a lot of money.

• 18:08David Hoffman?

  And so from 2008, the banking sector probably loses their appetite for credit risk. I think that's one of the important pieces of setup here. And so what you're saying is they go into the most solvent entity that exists, which is the Fed, because they can print money. But in order to have any sort of margin whatsoever, they have to buy the longest-term bonds because we were existing inside of a paradigm of zero interest rates for so long. That was the equilibrium that has been established almost, almost completely since 2008. And so that's the setup for like what I'm modeling out as like the Fed rug pull, because they inject a bunch of liquidity and then they jack up interest rates faster than they've ever jacked them up before. And so, Arthur, what does

• 18:51David Hoffman?

  this do to the banking sector? And like, this is the setup for this current crisis that we're inside of, correct?

• 18:56Speaker 00

  Yeah, absolutely. So the banking sector has all of these US government bonds, long-dated bonds. And then the Fed goes, okay, we've, us and the fiscal politicians have created all this inflation. We need to, we need to rein this in. And so we're going to raise rates really, really fast. And, you know, Jerome Powell thinks he's the modern-day Paul Volcker, who, you know, that starting in 1979, rose short-term rates up to almost like 20% to sort of break the back of inflation. And Powell says, okay, we're going to raise rates too, really, really fast, to get to, in his minds, neutral. And so the Fed is targeting core personal consumption expenditures, core PCE is their measure. And so he needs to raise rates really, really fast. And obviously, every month,

• 19:41Speaker 00

  there's a new high in year-on-year inflation as measured by the Consumer Price Index, and the politicians are all over him. You know, the Democrats are looking like they're going to get their asses kicked in the midterm elections because everybody's worried that the price of gas and the price of milk is going up. So there's all this pressure in the Fed, beat inflation, beat inflation, beat inflation. Fed goes, okay, well... We stuff the banking system full of reserves, right? So they're very, very solid. There's trillions of dollars sitting over here that I see from the banks that I regulate. Okay, they can handle it. So they start jacking rates. And so what happens? The prices of bonds in 2022, so Fed communicates, starting in December 2021, hey, we're going to start this thing called quantitative tightening, which means we're going to allow the bonds that are maturing on our balance sheet,

• 20:25Speaker 00

  we're not going to reinvest them into the bond market. So our balance sheet is going to shrink slowly at the tune of about $100 billion a month. Starting in, they ramped up, starting in September of 2022. And we're going to raise the short-term policy rate, starting in March. So they started raising policy rate in March. Quantitative tightening kicks in. So you have this dual effect. Not only is the price of money going up, but the quantity of money is going down as well. And so it's really, really tightening financial conditions. And as a result, 2022 was one of the worst years for the bond market on record, right? Because when you move from essentially 0% to 1% interest rates to even 2%, 3%, 4%, like to us, it's only a few percentage points difference in the rate of interest.

• 21:07Speaker 00

  But that's a 2%, 3%, 4% change in the nominal level of interest rates. And on a highly nonlinear bond that has a lot of what we call gamma convexity at the zero bound, it causes ridiculously bad losses for anybody who's long bonds. And as we saw, bond funds got their asses kicked. Bloomberg aggregate bond index was down something like 15% or 20% in the year, which is the worst showing since probably late, early 19th century, at least in the US context, in terms of the bond market. And the banks are basically sitting on all these losses. And so the bank's balance sheet is broken up into two things. They have what we call available for sale bonds, which are the bonds that they mark to market. And so those will fluctuate and you can see gains and losses.

• 21:51Speaker 00

  And then they have held-to-maturity securities, which is this essentially sleight of hand that they get to play. They say, oh, I have a 30-year bond. I'm not going to sell it for 30 years. Therefore, even if the price goes down 50%, because I'm waiting for maturity and I'll get back all my money plus interest, I don't need to mark that to market. And so if I have a lot of held-to-maturity securities and the prices start tanking, Hey regulator, don't, don't come after me for breaching regulatory deposit or, you know, requirements. These are held to maturity. You can hold these at par. And the regulator says, oh, sure, sure, because we don't want to like actually like do our jobs and, you know, look at what the banks actually hold. And so then we get to play this game that the banks have all these unrealized losses on held to maturity securities, but from

• 22:36Speaker 00

  an accounting standpoint, they're, they're solvent and they meet all the requirements.

• 22:39David Hoffman?

  And for some reason, this is legal, which is insane, right? Because we're, we're basically pricing in the future of what a bond will be priced at in the future and saying that you can account for that today. Do you have any intuition as to why this is allowed?

• 22:55Speaker 00

  Well, you know, from a, from a logical standpoint, if you, if the bank says, I'm never going to sell this and it's with the US government, then I should not be penalized in terms of a capital charge. So if you think, you know, US treasuries don't require any additional capital against them as per, I think, Basel III banking regulation. So what is a bank versus if they like to you and me, then they, they need to reserve against losses, right? Because we could default. So from a capital perspective, lending to the government means I don't have to put up additional equity or capital against these loans or reserve for losses versus lending to real people and real businesses, that's required, that's considered riskier. Therefore, I need to put up additional capital. So am I going to make those loans? Fuck no. I'm going to lend to the government. Right? I'm

• 23:40Speaker 00

  getting two or three percent risk free essentially for doing that versus taking real risk to underwriting a loan and then getting charged more capital and possibly I could breach my, my requirements and have to go to the equity markets and raise more funds and just not, not a lot of fun. I like to do the easy thing and still get paid. Right? And so that's what banks did.

• 23:59David Hoffman?

  And importantly, regardless of how you measure the value of the bond, whether the government allows you to measure it at the full term maturity, it still doesn't change the fact that there's only so much cash that's available for withdrawal by all of these banks. And so that kind of brings us to where we are today.

• 24:16Speaker 00

  The bond is worth what it's worth. The market doesn't lie. You know, the treasury's down 30%. Okay, cool. You can ignore it for 30 years or if you have to sell it today, then you're realizing a 30% loss. And that was the issue.

• 24:30David Hoffman?

  And this is kind of where we are in the current state of affairs in the last like week or so where the bank stocks are like red across the board. And so can you just like, give us an audit, a sit rep of the current state of the United States banking sector? Like, everything from my knowledge is like, deeply red. How bad is it?

• 24:51Speaker 00

  Again, it's a bifurcated market. It's, I think the, the US is sort of at this ideological turning point. They don't know what to do, right? It's, do we want to be like China, which has essentially four state banks? All credit is, you know, going through those banks, and that's Bank of China, ICBC, Bank of Communications, and CCB, China Construction Bank. You could, now it goes to be like JP Morgan City, Wells Fargo, Bank of America, right? Is that what the, is that what the US regulators want the banking system to be? Let's have four really, really big banks. They do all the credit creation, they're super sound, but there's, you know, they, they ossify, there is little to no financial innovation, blah, blah, blah. But, you know, they're essentially actors of the state.

• 25:35Speaker 00

  Or do we want to have a more freewheeling market where you have thousands of small banks catering to the different, you know, how a different location might do banking, or different credit conditions? Right? It's kind of the reason why you have either, like, one central bank, which is like, let's say the ECB, right? There's one central bank for all of Europe, versus the Fed system where there's, I forgot how many regional banks there are, and they feed up into, into the Board of Governors, right? Because it's a little bit more decentralized structure, because the US is coming from this agrarian perspective of, okay, there's different regions in the US, the different industries, therefore, there's going to be different rates of interest that would apply. Which one do you want to choose? It's sort of a philosophical question. And so essentially in the US, you have this sort of schizophrenia. You have, on the one hand, all these rules

• 26:20Speaker 00

  that are supposed to make banks safer, but all they do is increase the cost of compliance, and mean that there's only really a few handful of players that can afford to do it, the really, really big banks. And then you have all of these long tail of smaller banks that essentially serve all the things that the big banks don't want to do. Because the big banks don't need to serve Silicon Valley startups. The crypto industry, um, legal marijuana, like all these different things that that people that other banks might cater to that the big banks don't need to because they have so much business. They have the biggest companies in the world stashing billions of dollars of deposits. They can lend them money. It's very safe. Like, those are the kind of clients that these smaller banks will never, ever have. And so you have this sort of this different banking system. The big banks are fine. They've got trillions of dollars of excess liquidity

• 27:05Speaker 00

  with with the Fed. They have essentially an explicit government guarantee because they're deemed too big to fail. Um, but then the smaller banks don't have this guarantee. They're supposed to be these free market actors responding to, you know, supply and demand and the market. And so that was a setup for where we are today. Everybody did the same trade. It's just the smaller banks did it in much bigger size relative to their equity capital. They got a lot of deposits that they never had before. They made a lot of loans to the US government, right? And not only the US government, they were responsible for a lot of the, you know, construction loans, a lot of the commercial real estate loans, which is now in focus, right? So they were doing all the things that generate the economic activity of of the United States. And in most countries in the world, it's

• 27:49Speaker 00

  the small businesses, the single operators, they're responsible for the majority of all economic activity. Those people can't get accounts at a JP Morgan or a Citi, but they can get an account at um, First National, uh, at a Silicon Valley Bank, at these smaller banks. And so they were the ones making all this, these riskier loans. They were the ones who had much more exposure to, you know, a rise in interest rates based on their government bond portfolios. And that's where we are today. Now, obviously, all banking stocks are down across the board, but no one's worried that JP Morgan's going out of business. But they're worried about these smaller banks that that aren't too big to fail. The question mark of what is the, what is the government gonna do? Are they gonna extend? Can they

• 28:30Speaker 00

  access a discount window? Are they able to do the things that a JP or a Citi can do vis a vis their interactions with with the government? And this is uncertainty is what's driving people out of the system. Like, well, okay, do I leave my money at this smaller bank and take any risk that for whatever reason, the politicians decide this one, we're gonna let this one fail. We're gonna do free market over here, socialism over here. And so then, you're like, I'm gonna go with socialism, because then I get my money back. And then that's, and that's the problem. So all the deposits are like, fuck this, I'm out. And then as the deposits leave, the small banks are like, okay, well, what do we have to do to to give back the money? We have to sell these bonds. And then that is why, this is where this bank term funding program come about is like,

• 29:14Speaker 00

  okay, the Fed doesn't want us to sell the bonds because if they sell these treasuries, not only do they realize a loss and technically go bankrupt, they create a disorderly market in the treasury market, right? Because liquidity has declined since 2008 when essentially the government made it very hard for banks to make markets and treasuries profitably. So they said, you know, okay, we're going to step back. Now, the majority of liquidity are these non-bank financial actors, but, you know, they're not going to provide liquidity when it's needed, they'll provide it when it's not needed, the fair weather friends of the market. And so the last thing the Fed and the Treasury want is everyone dumping bonds to get deposits to just go to stuff them in JP Morgan, right? It's kind of this like, it's this vicious cycle, right?

• 29:58Speaker 00

  Okay, we need to bail out the small banks because everyone is worried that we're not going to extend the same preferences of them that we're extending to these big guys over here, so everyone's going to the big guys. And then the small banks go under and it causes all this, you know, this knock-on effects. And so that was what the bank term fund program was there to solve. It says, don't worry, you don't need to sell your bonds. If depositors leave, just give us the bonds, we'll give you the full value of the bond in cash, and then you give your deposit a cash. And now you've done your duty as a bank. No issue, no bank failures. You might not make any money, but management, you're not looking like guys from SGB, Silvergate, Signature, who don't have a job anymore because they've been taken over, you know, you're there, right?

• 30:42Speaker 00

  So that's essentially the program in essence.

• 30:44David Hoffman?

  I actually haven't heard it articulated in this particular way, that I actually find this really, really useful. My mental model for like, all the shenanigans that have happened in the banking sector is that there's been a flight upstream to the big banks. The long tail of banks is more or less getting cut off because of the fastest rising interest rates that we've ever had. That, I think, is more or less what most people understand.

• 31:09Speaker 00

  That's true.

• 31:10David Hoffman?

  The fact that these... The fact that this long tail of banks are also serving the long tail of the economy is actually a new a new insight for me that I haven't heard before. And so this is perhaps why you started this conversation saying, well, what do we want out of our banking sector? Do we want it to be like China where everything does centralize in the four biggest banks inside of the country? Or do we want to actually promote the long tail of banks that promotes the long tail of the United States economy? And I think what you're saying is this new institution, this new bank term funding program is a political statement that we do want to support that long tail. Is this my interpretation?

• 31:47Speaker 00

  It's kind of a halfway house. It's not there yet. It's solved the first problem. The first problem was, I'm not going to get my deposit back. So after, you know, it was Silvergate first, now unfortunately, they were the runt of the litter. No one's getting their money back. And then you had Silicon Valley Bank and Signature Bank. Depositors are getting their money back, but management's been kicked out, equity's been zeroed, right? And then the third iteration was, okay, we have bank term funding program. Nobody's going bankrupt, nobody's losing their jobs. Depositors get their money back. But the cost is, it's not free. So the problem is that my deposits are, were at 0%.

• 32:27Speaker 00

  The Fed via the reverse repo and short-term treasury yields is 4% to 5%. And so depositors are like, okay, I can leave my money here, take risk if this bank goes bust, and I get 0%? Or I can go give my money to the Fed overnight via a money market fund. They could print money, they'll always pay me back, and I get 4%? Why the fuck am I sitting in this deposit? And so I'm just going to keep funneling money up to the Fed, right? Funneling money to the US government in short-term treasury bills.

• 33:04Speaker 00

  And what does the Fed do? It says, okay, well, to fund that, we're just going to let the banks give us their underwater paper, their mortgages, their treasuries, and we'll give you back dollars. But that doesn't solve the issue that the difference between what the banks can afford to pay, which let's call it 1% on deposits, versus what the federal government is giving on an overnight basis, which is 4% to 5%, is too large, right? The banks can't make money. Like, small banks cannot make money borrowing short and lending long. We saw this with the inverted yield curve, you know, 2-year versus 10-year, 2-year versus 30-year. Before this crisis broke out, 100 basis points negative, essentially, massively inverted, which is telling you the banking system cannot make money. And

• 33:49Speaker 00

  as students of financial history, the, you know, the central banks know that if your banking system in a fiat economy, in this leveraged business cycle that we have, if your banking system is not sound, your economy can never be sound. And it's been evidenced time and again, right? Japan, 1989 crash, economy's flatlined for the past 30 years. China tried to go after its property market. Banking system was about to collapse. They've relaxed some things a bit, but China's on path for another 20 to 30 years of essentially, if you look at the real numbers, zero growth, right? Because the banking system needs to allocate these losses. The US did, well, some people will say the smart thing in 1930,

• 34:29Speaker 00

  very painful, they allocated losses in the 1930s, caused the Great Depression. However, that was all expunged, that the GDP was much lower when they came into World War II versus Europe, who didn't do that. And they benefited from it, because they took the pain. This situation, we don't take the pain. We extend it out further. But the pain will get paid by just below trend or zero growth. And so, this is what happens when the banking system can't make money, and everyone requires a loan to expand output. The small banks cannot make money if the Fed funds rate's at 4%. Even if they give their treasuries to the Fed, great, they've solved the bankruptcy issue, everybody gets back their money, but the bank cannot make money. The bank is just

• 35:13Speaker 00

  going to accrue losses. So these stocks, even if they're not at zero, they're dead money. Why would you invest in these things? These small banks can't make money, especially if the yield curve is, even if the yield curve goes positive, the short end rates are still too high relative to their blended costs of where they originated these initial loans. They can't pay 4% on Fed funds. So while the Fed has solved the issue of everybody getting their money back, who's a US bank who holds treasuries, they haven't solved the issue of, I'm a small bank, I cannot power the American economy because I can't issue loans because I'm losing money and their interest rates are too high at the short end for me

• 35:54Speaker 00

  to pay depositors something that's going to attract them to my bank so that I can lend money to the small business or the single proprietor. So they've solved this very small issue. I mean, it's massive impact in terms of liquidity, but they still haven't solved the real issue, which is the banking system is broken. They can't make money, they can't make loans, and the US economy and I would say most of developed world economies are on track for a nasty business cycle credit induced recession because the banks can't make any money with short rates this high.

• 36:27David Hoffman?

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• 37:25David Hoffman?

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• 38:54David Hoffman?

  displaying your transactions in a human-readable format with automatic warnings for malicious transactions or phishing websites. Phantom has already saved over 20,000 users from getting scammed or hacked. So get on the Phantom waitlist and be one of the first to access the multi-chain beta. There's a link in the show notes, or you can go to phantom.app/waitlist to get access in late February. Yeah, okay, so I think this really pivots us now from talking about what's happened to what is going to happen, going from the past and present into the future. So there's a couple of different threads we can pull on. There's the recession thread, like, okay, so I think you actually kind of just illustrated that this is what's next, is at best, non-growth, at worst, a recession.

• 39:34David Hoffman?

  Also, I want to talk about, because like what's going on on the other side of this content sphere is Bology's insane prediction that Bitcoin is going to hit a million dollars inside of 90 days because all of this money printing, all this QE is coming into this world. And I'm wondering, what's your take on that? And so we'll talk about the recession, we'll talk about how this relates to crypto assets and what we all need to do about it. But let's actually start with crypto assets. Because we have this bank term funding program, we have a bunch of new injection of liquidity and money into the economy. What does this do to crypto? And what does this do to, or risk assets in generally speaking?

• 40:12Speaker 00

  Right, so let's separate risk assets. So I spoke about this at the end of my article. I think it's Perry, I forgot his name. This is professor, I think, Columbia. Inside money, outside money. Inside money is money where you're a liability on somebody else's balance sheet, right? Inside money is a US dollar. Inside money is Japanese yen, euro, yuan, whatever. Inside money is stocks. Inside money is bonds, right? These are all things that exist in the financial ecosystem. You can't utilize these things without interfacing with the fiat financial system and the people deputized to act in it. You have outside money. Outside money is not a liability on somebody else's balance sheet.

• 40:55Speaker 00

  That would be gold. That would be your real estate, your apartment, your house. That would be Bitcoin, obviously. Outside money doesn't care what happens to the banking system. The banking system goes bust, outside money still works. You still can live in your house, you still can walk around with a barrel of gold, you still can use the Bitcoin blockchain, regardless of whether or not JP Morgan, or Citi, or First National, or SVB, or any of these banks are in business, right? And so there's risky assets in both of those buckets. But if we're talking about essentially, this is the end game where the...

• 41:29Speaker 00

  Explicitly or implicitly, the major central banks are now in the business of cashing the checks of the government. That is, by definition, the road to hyperinflation. Doesn't mean you're gonna get there, but you're putting in place the prerequisites to get there. Then, do you wanna own inside money? Because inside money's gonna get deflated, because there's gonna be way more fiat money out there. You wanna own outside money. You want gold, you want property, you want bitcoin, you want vintage cars, whatever it is, right? And so, that is the setup, right? If we believe that the authorities are committed to saving the banking system, and saving the banking system essentially means guaranteeing that no bank can ever go bust, which means that banks that buy government debt can do it as much as they want, and we're gonna give

• 42:13Speaker 00

  them par, whatever the value of the debt is, par meaning 100% or face value of that debt. At a certain point, the money supply expands infinitely, and I don't wanna have claims on this system. I wanna be in outside money. I want bitcoin, right? And that's where this trope of bitcoin one million comes from. Now, while Balaji, I think, is doing a very great marketing campaign and this bet, and I don't know how much he's gonna lose if he actually loses the bet, probably nothing in a percentage of his net worth. Do I think bitcoin's going to a million dollars in 90 days? No, I do not. Do I think bitcoin could go to a million dollars in this cycle? Absolutely. And this cycle would be the next two to three years, for sure.

• 42:57Speaker 00

  And the reason why is, okay, yes, I and others say this is quantitative easing, this is money printing, this bank term funding program. But, right now, all this is doing is guaranteeing that depositors get their money back. This isn't inflationary, as long as depositors keep their money in the banking system. Because what's gonna happen? If all I'm doing is taking my deposit from Silicon Valley Bank and putting it into JP Morgan, and Silicon Valley Bank, whoever buys it, can't originate any new loans, JP Morgan's not gonna originate any new loans, JP Morgan's just gonna stuff in an interest on excess reserves at the Fed, they're not lending any of this money out. So, there's not any credit creation happening, I'm just guaranteeing losses, right? So, for the time being, this is all dead money.

• 43:41Speaker 00

  The banking system can't expand because it's underwater, because short-term rates are too high, right? But, because I've put this facility in place...

• 43:51Speaker 00

  Either the Fed starts cutting at the next, at the next meeting, I don't think they will, but they could, or a nasty recession forces them to cut anyways in the, in the near future. That I believe is my mental model is for the cuts gonna happen. Once those rates start dropping, you've, you have this, all this dry powder that's here. And then if you're like, yes, okay, banking system sound, yield curve is, is steep again, or not inverted, game fucking on, I'm buying everything under the fucking sun. And banks start lending, people start buying shit, and that's when you get the massive inflationary impulse. And that's when you start seeing the real gains in, in Bitcoin. So while we've made, had this move from fifteen thousand to, to, you know, close to thirty thousand,

• 44:35Speaker 00

  a hundred, hundred percent off the lows, I think that's just telling us the direction of travel. I think that the, the path to get there is going to be quite rocky. Cause let's say that the Fed comes out tomorrow and they say, or by the time this airs, and it's twenty-five or fifty basis points hike, right? And essentially they're gonna melt down the rest of the US banking system by doing that over time, then you could see a risk-off scenario and Bitcoin could get impacted and give up some of these gains. You could see Bitcoin go from twenty-eight down to twenty-five thousand, right? And not go into this million dollars everybody's talking about. So the path is uncertain. We, we know the result. The result is the Fed either hikes and crashes the banking system, or cuts, saves the banking system. Either way, they're

• 45:17Speaker 00

  going to be cutting it eventually. And the money that they've created in this facility has created an infinite guarantee, which I think will expand it even further as they see more and more of these small banks, you know, and the, one tangent, the facet of the American political system is even these flyover, small bumblefuck states have two senators, right? So they still have power. And if mama pop is banging on their senators' door, like, why the fuck are you letting my bank fail? And these motherfuckers in New York are have paying bonuses at JP Morgan, guess what's happening? There's a, there's gonna be a nationwide guarantee in all bank deposits. It's just politically... In a post agrarian economy where you still have a lot of power in these smaller states

• 46:00Speaker 00

  that aren't really connected to New York and Silicon Valley, there's going to be political pressure to extend this guarantee to everyone. It's just going to take a banking crisis and some more banks to fail for them to get there, but they'll get there eventually. But it's setting the seeds for when things really take off, they're going to take off even bigger than before because the pile of money and the guarantees that have been put in place are essentially guaranteeing an infinite amount of money printing. As much debt as the government can print, can issue, the banks are there to buy it because the banks don't have any risk anymore. That's the point I'm making. But we're not there yet. And so, yes, okay, Bill Osi's making this bet. I don't think it's going to happen. My mental model is it's probably, we're probably, you know, we'll chop here, maybe we get to

• 46:43Speaker 00

  30,000 and, you know, don't break through, whatever. I still see some medium-term choppiness before we really get lift off. We really need the Fed to really break the banking system. Now, maybe they're going to back away from the precipice and hike. I don't know.

• 46:59David Hoffman?

  I think I'm still missing a link here between how there's enough total money creation to send Bitcoin even to a million dollars inside of two years. The numbers that you put in your article is that the bullishness, if you will, because of, you know, money issuance is bullish for risk assets. You're saying that the bank term funding program is implicitly printing 4.4 trillion dollars. And that is just what I'm understanding to be the delta between the actual value of these underwater treasuries and what they will be valued at their full-term loans. Is that?

• 47:33Speaker 00

  No, so I'm basically saying the amount of US treasuries and mortgage-backed securities held on US banking system balance used in aggregate is 4.4 trillion. And that's been guaranteed. Right? So if you want to go in 100 dollars to the Fed, you can get 4.4 trillion dollars. Now, it's up to you. Or you're depositing what you do with that money, but essentially the entire deposit base, four point four trillion dollars can be exchanged for cash using these securities. That is quantitative easing by definition. Right. What you do with that cash determines how financial markets, you know, Sure. deal with it, right? Right. So then the next question is, okay, four point four trillion is about 300 billion more than what happened during COVID in terms of the rise in the failed balance sheet. That still doesn't get us to a million, even if we extrapolate on a one for one basis. How do we get to a million dollar Bitcoin?

• 48:18Speaker 00

  Well, the, the next situation is, okay, well, the small, a lot of small banks and the ones that are really getting punished right now are the ones that don't, that didn't lend to the government. These are the banks that lent to the multifamily, like the condo builders. These are the banks that lent to the person building an office building. These are the banks that lend to mall operators. These are the banks that lend to small mom and pop businesses. They originated all these loans. These are not eligible at the Fed. This is their predominantly what their loan book is handled. But everyone says small bank bad, big bank good. I want my money back, right? And they go, fuck, well, we can't give this bond to the Fed because they're not accepting it. So we've got to sell it. Who's buying it? Nobody, right? No one's buying these bonds. These markets dead, right? BlackRock has a real, I forgot the name of the real estate fund.

• 49:03Speaker 00

  They gated withdrawals. This market's fucked. Nobody's getting out, right? And so this is why the stress is not going to, it's going to be on any bank that the majority of their loan book is non-US treasuries and mortgage backed securities because those are not guaranteed right now. And that's where the pressure is going to come. And so, once we see one of those banks fail, and I, I haven't done the analysis and I don't know the names of the banks that are more heavily in this, that bucket, but if you're looking at banks and you want to say, okay, this is the bank that I think it might be a good short, those are the banks. Their loan book is predominantly non-treasuries, non-mortgage backed securities because those are not guaranteed. So when the deposit leaves, that bank goes bust until the government comes in and says,

• 49:44Speaker 00

  actually, every single loan originated on a bank balance sheet regulated by the FDIC, whoever the regulator is, is now guaranteed. So what is that? The US has about like eighteen trillion of deposits. In essence, the entire banking system, right? They need, that's where they have to go to. Because the market's gonna say, okay, well, cool, you got treasuries? We're not fucking with you. You've got loans to commercial real estate malls, businesses? Yeah, we're fucking with you. Right? And so those are the people that are gonna feel the pain. And I think eventually, they're going to get bailed out too. Because again, they're the ones that power economic growth. They're in states that have two senators, and they can apply political pressure to get what they want.

• 50:29Speaker 00

  And so I think that's the massive travel. So that gets us to eighteen trillion of implicit guarantee. Now, the real coup de grace for this program, and I think which is super elegant in what they did, is the real problem is not the immediate problem of the banking system. The real problem is after the debt ceiling gets raised, July, August, September, whenever it is, the US government is fighting wars all over the world, and not just, you know, fuck 'em up, shoot 'em up wars. It's war on climate change, you know, all these esoteric, you know, non-defined concepts that we're fighting a war on, right? And so these are expensive, because you're spending a lot of money. You have the, was it the Inflation Reduction Act, or whatever bullshit name they came up with.

• 51:12Speaker 00

  And they're just handing out money to preferred industries to do stuff, right? It's expensive. And it's not as if tax receipts are growing, they're actually falling. And so there's gonna be deficits that need to be funded in the single-digit trillions, and it's gonna keep growing, year after year after year. Who's gonna buy these bonds? Like, the US banking system, post-COVID, could be counted on to buy government bonds, because they had a great spread on them. And the Fed said inflation is transitory, there's no more inflation, it's dead, blah, blah, blah. You don't have to worry about interest rate risk. The bank said, okay, my regulators tell me you don't have to worry about interest rates. I'm not worried about interest rates, I'm trying to get paid here. And, and so they piled in. But you've just taken that away.

• 51:57Speaker 00

  They just blew up because the Fed blew them up by raising interest rates so high on their US government securities. So how do we get the banking system back in the business of buying the debt that we have to issue? Well, we guarantee that if they ever get into problems, we just give them back dollars that we printed. And from a technical standpoint, the Federal Reserve, from an optics perspective, is not cashing the checks of the government, which in classical economists says, "Hyperinflation, hyperinflation, we need to sell bonds." It's the banking system buying the bonds of the US government because they're guaranteed to get money whenever they need it from the Fed. And if the Fed reduces interest rates to a low enough rate where the curve goes positive

• 52:38Speaker 00

  again, long-term rates greater than short-term rates, it's profitable for the banks to have deposit base, buy every single issuance that they can of US government debt, and if they ever need to give their depositors back money, they give the debt to the Fed, the Fed gives them dollars, right? And so we go this little merry-go-round, and the US government gets to stuff bonds down the throat to the banks, and everybody's happy. And that's what I think the real end game is, and that's how you get to Bitcoin 1 million, because that is yield curve control. That is the central bank cashing the checks of the government. A few steps removed, but it's the same fucking thing. And that is where, that's where I think this program is beautiful in terms of how beautifully

• 53:20Speaker 00

  sinister, but beautiful in the same, in some respect, and how it accomplishes this goal. People aren't going to think about it until it exists. And, you know, obviously they have this, "Oh, it's going to end next year." There's no way it can end next year. If, why would I hold a banking stock if I know that they've got all this thing, all this debt that they can't tender to the Fed? They have the same problem. The problem hasn't gone away. Um, so are we going to crash the banking system again March next year? Are we just going to keep doing this again and again and again? No, they're going to extend it. And once they've given it infinite extension, then the banks say, "Okay, cool, regulators said I can use this program. Oh, government's selling a bunch of 30-year debt at, doesn't matter what the fucking interest rate is, it's positive spread, I get to make money out of my deposit, I'm there, take all that shit.

• 54:03Speaker 00

  Oh, I need, my, my customer wants to take that money and, I don't know, go buy something? Cool, Fed, here are these bonds, give me back 100%. Um, I'm still making money." Great. So it's, that's the $1 million Bitcoin. But that doesn't happen immediately. This is, it's a path there. And I think it's not entirely straightforward, but that's where I see it going. And I think Bitcoin eventually will discount that future. It's not going to happen before June to help Balaji out. But I think as we start seeing the slow motion evolution of everybody getting a bailout, the guarantee expanding, expanding, and expanding as more holes are poked in. Well, why did he get a bailout and I didn't get a bailout?

• 54:45Speaker 00

  Right? That's the question. That's, that's the, it's the unevenness of the response. Some people are getting, you know, a good response and some people are getting a bad response. And it's only to do with what they hold on, on their balance sheet. And there's nothing else to it than that. And so I think as we move down this path, that's how we get to $1 million Bitcoin. But it's not an immediate thing. It's going to happen over time.

• 55:09David Hoffman?

  Right. Okay. So implicit in your model of the future is just an increasing scope of the bank term funding program. So the bank term funding program is constrained in the assets that are eligible to access the facility. And it's also constrained in scope in that it expires, according to the Fed, inside of one year. And what you're saying is that both of these variables are going to expand just because of the political interests, the political forces that will inevitably be placed on, on the Fed.

• 55:39Speaker 00

  And the market forces. Okay. The Fed just bailed out two banks. Oh, the depositors of these banks. And if we, you know, take the media narrative at face value, it is the most toxic sector of the banking system. One bank linked to the crypto bros, the other bank linked to the tech bros. I couldn't think of two worse constituents in American politics right now that people want to bash on. Right? So, and but.

• 56:04David Hoffman?

  So we're starting from a real good place.

• 56:06Speaker 00

  The management, management got bounced and equity holders got a donut. Okay. But the depositors got their money back. So.

• 56:15Speaker 00

  Expand that, right? Why, if they're willing to do it for them, why are they willing to do it for, you know, XYZ bank and bumblefuck flyover country, America, who lends to farmers? And we all know the farmers have a lot of power because of how the system, the political system is set up between, you know, Senate House and the executive branch. And so I think the politics is going to dictate that you can't bail out the banks on the coast and not bail out the banks in the heartland, right? And that's, it's just state versus federal, you know, continuing, you know, clash, if you want to call it that, that exists in all countries with this, with a similar sort of political setup. Because

• 56:56Speaker 00

  who, how do you politically allocate the loss? That's the question. The politicians had to tell us, okay, well, there's a loss. We know there's a loss in the banking system. Who, who takes the loss? Is it the small bank over here? Is it the large bank? Is it the central bank? Is it the federal government? Is it the state government? That's up to the politicians to decide. And so, and you're, and if you're not able to clearly allocate losses in an objective manner, then you just get to bail out everybody. And so that's where I think we're going to go to, because there is no reason why I should bail out a treasury bond, but not the bond for the commercial real estate project. Why that one, not this one?

• 57:38David Hoffman?

  Right. So, Arthur, who loses here? Because this sound, you're, you're painting a very, I think, rosy, optimistic picture, oddly, oddly, because like eventually you're saying that everyone, everyone's getting all their money, banks are going to be able to take free risk, Bitcoin's going to a million dollars in two to three years. Who, where, who takes the L?

• 57:57Speaker 00

  The L is anyone who holds, you know, dollars, right, inside, inside of the system, right? So if you, if, okay, if Bitcoin's a million and oil is $500, right, or if Bitcoin's a million and it costs you, you know, a family of four can feed themselves for $10 and now it's $50, right? And they didn't own any Bitcoin and they didn't own any financial assets outside of the system. That's who loses. The inflation just goes nuts. Yeah, you can get your money back. We'll give you all the dollars you want. Those dollars just don't buy real stuff anymore. Hey, I need, I'm an older person and I need healthcare, right? And, you know, the healthcare worker, instead of it's a, you know, to get a nurse in, it's $200,000 a year. Now it's half a million to get a nurse in. And so healthcare

• 58:40Speaker 00

  costs go up, right? There's all these things that the average person needs that the government can't print. And if they're just going to not allocate the losses for all this debt, which is essentially that is, I'm gonna take the future and I'm gonna spend it today, right? So we spent the future. There's no more future, right? We have to pay for it. And so if you have money inside of the system, you will pay for it. And it's implicit tax on anyone who saves and things that don't go up as fast as the amount of money printed. And so that's the game. It creates a financial speculator out of everyone, even if you don't think you're a speculator, you are a speculator. Because now you need to determine, okay, I know my family's cost of living is going to go up. I know my healthcare is gonna get

• 59:23Speaker 00

  more expensive. What can I buy that's going to help me, you know, accomplish those goals with an acceptable amount of risk? The answer is nothing. You become a speculator. You're speculating on stocks, you're speculating on property, you're speculating on crypto, you're speculating on everything, because you're spending all your time thinking about, how do I provide for my family when the currency that I hold is being devalued constantly? And that's who loses. Everyone loses. They just don't think they lose because, yes, I got my money back in nominal terms. But the cost of things that are outside of the banking system that I need, food, energy, healthcare, are all going up exponentially.

• 1:00:04David Hoffman?

  So this sounds like something crypto people are all too familiar with. If they're paying attention to the world of inflation, this has been a big crypto narrative for a long time. And Balaji, in our recent podcast with him, said, yeah, America is the new Argentina. There's new rampant inflation. And so I think this is, this is what you and

• 1:00:22Speaker 00

  I would say it's not just America, it's the whole fiat banking system. Because while America is the worst example of this, it's in Europe, it's in, you know, it's in China, it's in everywhere. Capitalists, communists, whoever the fucking ism you want to say your country, everybody said, I'm gonna borrow from the future to fund stuff today because that gets me elected or that keeps me in power. And it doesn't matter how you get elected, that, that was the game.

• 1:00:45David Hoffman?

  Right.

• 1:00:46Speaker 00

  Everybody played the game. Future's over. Okay. Unless we're gonna discover, as I said in the article, some new sorts of energy that's extremely dense, uh, it's gonna power the next, you know, path forward in human, you know, evolution of society, then we gotta pay this this debt.

• 1:01:00David Hoffman?

  Right.

• 1:01:00Speaker 00

  And it's gonna come in the form of inflation and zero to no growth for a very, very long time.

• 1:01:05David Hoffman?

  So the answer to the question, who's taking the L is not just the US dollar, but it's the entire fiat regime.

• 1:01:11Speaker 00

  Exactly.

• 1:01:12David Hoffman?

  Okay. Wow. Uh, that, but that, the, the Argentinean economy-

• 1:01:16Speaker 00

  And we know this is the case, and we know this is the case because what did the Fed do last weekend? Um, or whatever it was, they said, they didn't, they didn't come out and say, oh, we're gonna bail out the small banks in Iowa, Nebraska, who lent to real American businesses. Oh, no, we're gonna bail out every single friendly central bank, whose banking system all had the same trade on. Because once they guarantee that if you hold the US Treasury in your US bank, you get your money back, as a depositor, why the fuck would I hold my money in any other bank? Right? US government, most powerful government, US dollar, reserve currency of the world. If a bank held US Treasuries, my money's good, backed by the government. And if I have a foreign account, if I'm abroad and I have a foreign account in the US, I reckon

• 1:01:57Speaker 00

  stuff my money, I'm dumping euros, I'm dumping yen, I'm dumping everything, I'm buying dollars and I'm putting it in the bank because I know I'm safe. Because guess what? Every other single banking system did the same trade. Print money in 2020, 2021, jackfucking industries up to 2022, massive losses, right? Undeclared losses. Every single banking system has the same trade to varying degrees. Everybody knows this, and now we've just called bullshit on the banking system. And so the Fed had to bail out every other one of their foreign compet-, um, their, their foreign central banks who are friendly, by saying, hey, we're gonna have unlimited swap lines for you guys. So what's the trade for them? It's, okay, I have Treasuries, or whatever, client says, I want my dollars, they get the dollars from

• 1:02:42Speaker 00

  the Fed, they pledge whatever they need to pledge, right? And so this, that was a bailout of the entire world Euro-dollar market, uh, over the weekend, that the Fed did, because they all have the same issue. And until they all move to the same sort of deposit guarantee, um, then they're going to see the sucking sound of deposits from their system to the United States, and the swap lines sort of solve that issue. So it's given time for the ECB, the BOJ, the BOE, the RBA, and all the different central banks, to enact a similar sort of guarantee on deposit. It's coming everywhere. America is just the worst example of it, but everywhere in the fiat world, this is going to be the name of the game because guess what? They're all educated at the same schools. They all believe the same stuff and they all want intellectual cover.

• 1:03:26Speaker 00

  So if the Fed and the Treasury have started the bank term funding program, they'll change the fucking letters, put the Google Translate on and they'll, they'll make it sound whatever native thing they need to make it sound like. So it doesn't sound like the bank term funding program. It's the same fucking shit and it's going to happen everywhere.

• 1:03:41David Hoffman?

  Okay, so the Federal Reserve and the dollar obviously is like the epicenter. And what you're saying is that like this gravitational pull is pulling in all the other central banks along with it. Can you unpack the swap? What's the swap thing? Cause that's the really the thing that connects to all of this. Can you just do that?

• 1:03:57Speaker 00

  Yeah, so if I'm a local bank in Europe, say, say I'm a credit trees. And everyone's like, oh, fuck, credit trees is fucked. I want my, I want to put my money in dollars, right? So I'm going to, I want, I want my euro deposit is gone. I'm going to FX them into dollars. I'm going to put them in the US bank branch, right?

• 1:04:17Speaker 00

  Where the dollar is going to come from? The banks have to sell something, right? What the US government does not want is all these foreign banks dumping treasuries to get dollars to pay the deposits back for the dollars that go into the US banking system, because then the treasury market blows up, right? They've got all these fires we were in and they're trying to piecemeal packs them up. They don't want the treasury market dysfunction.

• 1:04:36David Hoffman?

  Importantly, foreign banks owns United States treasuries. That's a common thing. And so this is the ammo that they have to fire into the market to sell. But you're saying the, the United States Fed can't, that's untenable for them.

• 1:04:50Speaker 00

  Exactly. So they don't want people indiscriminately dumping treasuries to get dollars back to pay back their depositors with those dollars just coming back in the US anyway. So they said, hey, guess what? Swap lines are open, you know, so it's national bank ECB, BOE. Don't sell your treasuries. Why don't you like take those treasuries on your balance sheet? We'll give you dollars. Don't worry about that. Get it, make sure your banks are cool, right? So you don't have a dollar funding program problem anymore. You can get all the dollars you need to satisfy deposits. Just please, please, please don't sell treasuries. Right, that you don't want that to happen. Keep them where they are. So here's a swap line. So we'll print the money and give it to you. That's essentially what they're doing.

• 1:05:32Speaker 00

  And they, and again, you know, the point I made is it's, you know, America like every other country in the world. Domestic politics is very xenophobic. If small bank in Nebraska ain't getting bailed out, why the fuck is Credit Suisse and UBS and Deutsche Bank and Barclays and all these motherfucking foreigners getting their dollars and I can't get my fucking dollars? And that's what their plan, they're not saying this, but that's why you do a swap line where people don't know where the fuck a swap is. Right? Because it's a very, you know, to most people it's an esoteric concept taught in business school. It may, it has no bearing on their day to day life, but it's a bailout of the foreign banking system that most people aren't going to notice.

• 1:06:11David Hoffman?

  So Arthur, what's the punchline here? Punchline, a few punchlines are the fiat regime's going to zero, dollars are going to inflate aggressively. Maybe, I don't know if you'll use the word hyperinflate, but it sounds like we're at least trending towards that. Crypto and hard assets that are quote outside the system are bullish and hedges against all of this. Like, how would you really just summarize what is next for this world? Because this seems to be a phase change in the world of money and finance and global, global economies that I have, we haven't seen since 2008 and maybe even bigger than 2008. What's the punchline here?

• 1:06:47Speaker 00

  Well, the punchline is that the banking system is being primed globally to be the buyer of last resort of all government debt. Right? And so if we think about the trillions and trillions of dollars of government debt, and if you want to add in like unfunded liabilities, which I would say is healthcare for the baby boomers globally, right? Hundreds of trillions of dollars that needs to find someone to buy it at a price that makes sense. Right? There is a price. You want to let the free market operate in the 30 year at 10%, 10%? Great. Bunch of people going bankrupt, right? But bunch of people don't, we don't want them to go bankrupt. But the loss is there. There is no escaping the loss. Now we're, as a society, going to politically determine who bears the loss.

• 1:07:29Speaker 00

  Right, and instead of saying, you know, financial institution A, B, C, D, you bear the loss, we're gonna say the entire global population in the fiat world is gonna bear the loss via inflation, and if you don't get your money into an asset that outperforms inflation in a fiat term, it doesn't necessarily have to be hyperinflation, you will lose out on real terms. So you better fucking understand what's going on and become a speculator, because everybody's a speculator now. Now, I believe that Bitcoin's a great asset, you might not believe that, you may think it's gold, you may think it's cow re-shiled, I don't know the fuck, doesn't matter. But again, in your mind, you're now a speculator, everyone needs to understand that, because this isn't, yeah, they got bail out, you get your deposit back, hunky-dory, but the end game is, the banking system must absorb

• 1:08:14Speaker 00

  all the government debt that is coming due to pay for all this stuff, to pay for climate change, to pay for the richest generation in the world dying and spending a lot of money on end-of-life care, um, as they perish, right? These are the things that must get funded, and we have less people with money to fund them, therefore, there will be inflation. Uh, and so I think this is just a clever way to stuff it in a place where people aren't necessarily gonna associate with hyperinflation, because what you don't want to have happen is a a mental shift of the average person saying, my currency is fucked, I get paid at 12 o'clock on Friday at 12:01, I need to have bought everything I'm needed by,

• 1:08:59Speaker 00

  right? That, that's Weimar, Germany, that's Zimbabwe, that's, you know, that's hyperinflation, where you need to dispose of your currency as soon as you get it because you're worried that the real good is going to be gone, or it's gonna be at a much higher price in the immediate future. And so that is the end game, and so that is why everyone is now a speculator. I believe that Bitcoin is one answer to this, there's all sorts of different answers, but that is the end game.

• 1:09:29David Hoffman?

  Is another way to say, everyone turns into a speculator, perhaps another way to illustrate this is that the denominator is uncertain, as in, it's no point denominating dollars anymore when they're all just losing their value. And so, you need to change up your denominator, and that is a source of chaos as the world tries to figure out, alright, we're not using the dollars as the denominator anymore, we need a different denominator, what's that denominator gonna be? Is that another way to say this?

• 1:09:56Speaker 00

  Yeah, exactly. What is, is it gold, is it oil, is it natural gas, whatever, right? It doesn't, doesn't matter what it is, but it's not as easily mentally to think, oh yes, I get a dollar, I know in a year that dollar is gonna buy me a loaf of bread, and I don't have to worry about that, now a loaf of bread is $2. That just adds an extra level of angst and anxiety into the average person, that now they have to worry about all this. And what do they do? They say, okay, fuck it, I'm gonna buy everything I need to buy today, right now, because I don't know what the dollar's gonna be worth, I don't know what the yen's gonna be worth, I don't know what the euro's gonna be worth, right? I don't know. And so, in the face of that uncertainty, I should just hoard as much as I can today. And that's how you get these insane, you know, price rises, price falls, and everything

• 1:10:41Speaker 00

  has become super, super chaotic, and you have all this volatility. And that's what, you know, central banks are there to do, is to suppress volatility, and now it's just gonna explode in their face. That's what they're worried about.

• 1:10:54David Hoffman?

  So, Arthur, what are you doing? What's your denominator?

• 1:10:57Speaker 00

  My denominator is essentially like, okay, oil, right? That is the master energy resource. And so, okay, what, obviously, you can't just own barrels of oil and like, you know, go and like scoop out a bit and use it wherever you want, right? You need to have something that is an abstraction of that. Bitcoin is pure energy money, because I burn energy to do work, to create this system. And it's capped at 21 million, right? And, most importantly, it's invisible and weightless. I can have as much or as little Bitcoin as I want and nobody knows I have it. And so in a system where the average person is worried about how they're going to afford their next meal, you can't be driving down the street in a Bugatti flashing yellow, that motherfucker gets killed.

• 1:11:41Speaker 00

  Right? And so ostentatious shows of wealth in places that are experiencing hyperinflation is a very dodgy, dodgy position to be in. So if you think that you're going to hold all your money in some very obvious form, then you're going to find out that you might be relieved of that sense of security very, very soon. And so that's why I think Bitcoin is very beautiful in that no one knows how much anyone has of it. And we can transact purely over the internet. And we know it's firmly based in spending energy to do work, that it is pure money. Purely worth us at the same time and purely worth everything at the same time. And that's why it's such an elegant concept. And I believe that it's going to be, for a certain percentage of the population, very well sought after.

• 1:12:25Speaker 00

  But the time is now because, again, if money leaves the system, then that loss gets recognized. As long as there's, as long as you stay in the system, as long as you own inside monetary assets, then you are subject to be inflated out of your money. But if you take your money today and you move into an asset outside of the system, then now they can't take your money away from you. They can't inflate you away. Right? And so you're going to see it become harder and harder and harder to own these things. Now, I don't think they're going to outright ban things because, you know, with the internet and the general level of information out there, I think people would take that as a very signal that the game is up. But, you know, they can heavily promote, you know, ETFs and all these products that live inside the banking system

• 1:13:10Speaker 00

  that supposedly give you access to price moves, but they don't actually give you the thing itself. And so I think people need to recognize that and it's very subtle and unfortunately it's very annoying. Like you have to think about these things. But if you want to have outside money, make sure it's actually outside of the system and make sure you get out as soon as you can get out because it's just going to be like a vice closing in. And you're optionally more constrained as things get more down the line. If this path continues the way I think it will.

• 1:13:40David Hoffman?

  Well, Arthur, I think this is, like you said in the beginning of your article, we didn't know how we would get here, but this has been the destination that Bitcoiners have been saying that we would arrive to for a very long time now. So, thank you for writing the article and guiding us through this, this piece of content here today. I really appreciate the guidance and the articulation. If there's anything, any topic that we've missed, or anything further that you have to add that I haven't asked about, has anything come to mind?

• 1:14:09Speaker 00

  No, this is great.

• 1:14:11David Hoffman?

  Arthur, thank you so much. Where can people read your stuff? Where can people find you? How can people follow along?

• 1:14:17Speaker 00

  Yeah, so @mediumcryptohaze, that's my handle there, [email protected], all the articles are published there. So you can just subscribe to either one of those mailing lists and you'll get my articles, or @cryptohaze on Twitter, I post them there as well. So, yeah, stay tuned. It's going to be, you know, a crazy wild ride, and we're only just, only just starting, but this was definitely a momentous occasion in terms of, you know, financial markets and what's going to happen over the next, you know, three to five years.

• 1:14:44David Hoffman?

  Yeah, to put on the crypto perspective, this seems to be kind of more or less what we were training for, perhaps, and at least we have your writing to guide us all along the rest of the way. Arthur Hayes, thank you so much.

• 1:14:57Speaker 00

  Thank you.

• 1:14:58David Hoffman?

  Payless Nation, you know the deal. Risk and disclaimers, Ether is risky, crypto is risky, DeFi is risky, but so is the entire fiat regime, and perhaps it's more risky, but you know, capital is flighty, no matter what. You can lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we are glad you are with us on the bankless journey. Thanks a lot.